Tax concessions damage country’s tax base: Former Indian FM

Oct 23, 2015 (LBO) – Tax concessions are not an alternative to a poor investment climate and damages the tax base of a country, Former Finance Minister of India Palaniappan Chidambaram said.

Chidambaram was delivering the 20th annual taxation oration at the Institute of Chartered Accountants of Sri Lanka Thursday.

Former Finance Minister said Sri Lanka has signed 24 bilateral investment treaties after 1980 which included various tax concessions, even though there is a question of their effectiveness.

Sri Lanka’s tax to GDP ratio is declining since 1990 and actual revenue collections were also lower than the budget estimates.

Tax buoyancy has been estimated to be 0.78 percent in the five year period till 2013, meaning tax collections not responsive to the pace of economic growth.

“Such incentives are not an alternative to a poor investment climate and may actually damage a developing country’s tax base,” Chidambaram said.

“The real drivers of investment are infrastructure, education and security.”

Owing to tax incentives given to corporations and widespread tax evasion, the total income reported by a company could be extremely low.

To overcome this issue, a minimum alternate tax has been proposed in India that will be calculated with reference to the value of the gross assets.

Chidambaram said Sri Lanka’s tax structure has also got complicated with plethora of taxes although a large proportion of tax revenues are collected from international trade.

“Some years ago, your corporate tax performance was quite poor in terms of both tax revenues and tax efficiency, due to tax holidays and incentives that you had offered to companies.” he said.

The Sri Lankan government has recently brought the Board of Investment under the Inland Revenue Act to limit tax holidays and tax exemptions.

Chidambaram said the Indian government has undertaken two major exercises to raise tax revenues.

In 2007 the country has started rewriting laws on direct taxes, mainly income tax and corporation tax.

“For income tax, the tax liability should be according to the ability to pay. Total income will be the measure of ability to pay. In case of corporation tax, all profits will be taxed.”

The second major exercise was to set up the tax administration commission, he said.

“The commission concluded that public institutions need fundamental reforms at least every decade, if not more frequently.”

Chidambaram further stated that these exercises are yet to be incorporated in the extant laws.

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